How Social Security Benefits Are Taxed—And How to Reduce That Tax

Many retirees are surprised to learn that their Social Security benefits may be subject to federal income tax. While Social Security was once considered tax-free, changes in legislation over the years mean that up to 85% of your benefits could be taxable—depending on your overall income. Understanding how these taxes work, and how to reduce them, can help you keep more of your retirement income.

When Are Social Security Benefits Taxed?

Whether or not your Social Security income is taxed depends on your "combined income," which is calculated as:

Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Social Security Benefits

Once you calculate your combined income, compare it to the IRS thresholds:

For individual filers:

• Below $25,000: No tax on Social Security

• $25,000 to $34,000: Up to 50% of benefits taxed

• Above $34,000: Up to 85% of benefits taxed

For married couples filing jointly:

• Below $32,000: No tax

• $32,000 to $44,000: Up to 50% taxed

• Over $44,000: Up to 85% taxed

Note: These thresholds are not adjusted for inflation, which means more people are getting taxed on their benefits each year.

Strategies to Reduce the Tax on Social Security

There are several proactive tax strategies you can implement to potentially reduce or avoid taxes on your benefits:

1. Manage Your Withdrawals

If you’re taking money from traditional IRAs or 401(k)s, those withdrawals count as taxable income and raise your combined income. By withdrawing strategically—or converting portions to a Roth IRA before you claim Social Security—you can reduce your taxable income later on.

2. Delay Claiming Social Security

Delaying your Social Security benefits until full retirement age—or even age 70—not only increases your monthly benefit but may also allow you to draw down other retirement assets at a lower tax rate before benefits begin.

3. Consider Roth Conversions

A Roth IRA allows you to make tax-free withdrawals in retirement. By converting traditional IRA assets to Roth gradually (often called "Roth laddering"), you pay tax now at potentially lower rates and reduce your taxable income in the future.

4. Watch Out for Required Minimum Distributions (RMDs)

After age 73 (or 75 depending on your birth year), you’ll be required to take RMDs from most retirement accounts. These add to your income and could push you into a higher tax bracket. Planning ahead can help you reduce the RMD impact by utilizing Roth conversions or Qualified Charitable Distributions (QCDs).

5. Use Qualified Charitable Distributions (QCDs)

If you’re 70½ or older, you can donate up to $100,000 per year directly from your IRA to a qualified charity. These distributions don’t count as income, which helps reduce your combined income—and the tax on your Social Security.

Final Thoughts

Social Security taxation is one of the more overlooked parts of retirement planning—but it can significantly impact your financial picture. The good news? With thoughtful planning and guidance from a tax professional, you can reduce or even eliminate taxes on your benefits.

At Avalon Tax & Financial Services, we help retirees understand and minimize the tax impact of their retirement income. If you’re nearing retirement or already drawing Social Security, contact us today to schedule a free consultation. Let’s create a tax-smart strategy that works for your future.